10/4/19: Russian Foreign Exchange Reserves and External Debt

As recently posted by me on Twitter, here are three charts showing the evolution of Russian foreign reserves and external debt:

Remember the incessant meme in the Western media about Russia eminently in danger of running out of sovereign wealth funds back at the start of the Western sanctions in late 2014? Well, the chart above puts that to rest. It turns out, Russia did not run out of the reserves, and instead quite prudentially used funds available to carefully support some economic adjustments (especially in agriculture and food sector), while simultaneously balancing out its fiscal deficits.

Do note that the reserves above exclude over USD 91 billion worth of Gold that Russia holds and continues to buy at rising clips.

The result of the prudentially balanced management of the reserves and the economy was deleveraging out of debt (a lot of this was done via restructuring of intracompany loans and affiliated enterprises refinancing), with a reduction in the external debt (chart below), without use of sovereign funds:

As of current, Russian foreign exchange reserves ex-gold are more than sufficient to cover the entirety of the country public and private sectors external debts.

If the above chart is not dramatic enough, here is a contrasting experience over the same years for the U.S. economy:

Nothing that CNN and the rest of the Western media pack ever managed to capture.

25/1/16: Russian Sovereign Funds: Down, but Not Out, Yet…

In the context of 2016 Budget, Russian sovereign reserves dynamics are clearly an important consideration. For example, in his recent statement, former Russian Finance Minister, Kudrin, has suggested that if Budget deficit reaches above 5% of GDP in 2016, the entire cushion of liquid foreign reserves held by the Government will be exhausted by the end of the year, leaving Russia exposed to big cuts in the budget for 2017. This is similar to the positions of Russia's Economy Minister Alexei Ulyukayev and the current Finance Minister Anton Siluanov.

The expectations are based on three considerations:
1) 2015 dynamics of Russian sovereign wealth funds;
2) Funds outflows expected under the external debt repayment schedules; and
3) A potentially massive call on Russian reserves from the VEB capital requirements.

I covered the last point earlier here. So let’s take a look at the first point.

Russia’s main and more liquid Reserve Fund shrank substantially last year as it carried out its explicit mandate to provide support for fiscal balance. Set up in 2008, the fund holds only liquid foreign assets and 2015 became the first year since the Great Recession and the Global Financial Crisis (2009-2010 in Russia’s case) when it experienced net withdrawals. The value of the fund fell from roughly USD90 billion to ca USD50 billion by the end of December 2015.

However, the key to these holdings is their Ruble equivalent, as Russian budgetary expenditures are in domestic currency. By this metric, the Fund has been doing somewhat better. By end of December 2015, the Reserve Fund held assets valued at RUB3.6 trillion, amounting to almost 5 percent of Russian GDP or roughly 1.7 times Budget 2016 requirement for deficit coverage. Budget 2016 is based on expectation that the Reserve Fund will supply some RUB2.1 trillion to cover the deficit.

The sticking point is that Budget 2016 - in its current reincarnation - is based on oil price of USD50pb. The Ministry of Finance is currently preparing amended Budget based on USD30-35pb price of Brent, but we are yet to see the resulting deficits projections. What we do know is that the Government has requested up to 10 percent cuts across public expenditure for 2016. Absent such cuts, and if oil prices remain around USD30pb mark, the deficit is likely to balloon to the levels where 2016 deficit will end up fully depleting the Reserve Fund.

Added safety cushion, of course, will be provided by devaluation of the Ruble. This worked pretty well in 2015, but the problem going into 2016 is that required further devaluations will likely bring Ruble into USDRUB 90+ range, inducing severe redistribution of losses onto the shoulders of consumers and cutting hard into companies investment in new equipment and technologies.

Bofit provided a handy chart showing the dynamics of Fund resources and a breakdown of these dynamics by key factors

Aside from the Reserve Fund, Russia also has the National Welfare Fund which was set up to underwrite public pensions. The Fund has been used to provide capital and funding to Russian banks shut out of the international borrowing in form of bonds purchases and deposits with the banks, as well as to some Russian companies, in form of debt purchases. These deposits and loans, however, are not liquid and, therefore, not available for fiscal supports. About only hope for some liquidity extraction from these allocations is via Russian corporates using cash flows from exports to repay the Fund - something that is unlikely to create significant buffers for the Budget.

At the end of 2015, the National Welfare Fund held assets valued at USD72 billion, of which USD48 billion (or RUB3.5 trillion) was held in relatively liquid foreign-currency assets and the balance held in assets written against domestic systemically important banks and companies. Even assuming - optimistically - that 10 percent of the residual assets can be cashed in over 2016, the liquidity available from the Fund runs to around USD50 billion.

Thus, total liquidity cushion held by two Russian SWFs currently amounts to USD100 billion without adjusting for liquidity risks and costs, and if we are to take nominal adjustments for these two factors, liquidity cushion probably falls to USD75-80 billion total.

It is worth noting, however, that Russia has other international reserves at its disposal. Per official data, as of the ned of December 2015, total International Reserves stood at USD368.4 billion, down USD17.06 billion on December 2014 and down USD222.17 billion on all time peak. In accessible reserves, Russia has International funds (excluding SDRs and IMF reserves) of USD363.07 billion.

I will be covering funds outflows schedule for 2016 in a separate post, so stay tuned.

4/4/15: A Sign of Ruble Stabilisation? Russian Forex Reserves Rise

The latest data (through last week) published two days ago by the Central Bank of Russia shows that Russian Forex reserves have risen for the second week in a row. In the week of 27/03/2015 Forex reserves rose USD7.9 billion to USD360.8 billion and in the week prior they were up USD1.2 billion. Thus, relative to the crisis period low of USD351.7 billion set in the week of 13/03/2015, Russian Forex reserves are up USD9.1 billion. This puts weekly reserves at USD2.2 billion below end of February reading.

This is a very uncertain development at this point in time. Russian Forex reserves were down 15 consecutive weeks prior to the last two weeks of increases, so it is too early to read the latest upticks as reversal of the trend, but it is pretty clear that, for now, things have stabilised somewhat.

Monthly data, not yet fully available, but reflective of the last week results, suggests that the aggregate reserves are slightly up m/m. At the end of March, Forex reserves at USD360.8 billion appear to be up USD579 million on the end of February.

In the year through the end of March 2015, the reserves are down USD125.33 billion (-25.8%) and on the start of the sanctions, these are down USD132.53 billion (-26.9%). Q1 2015 (end of quarter) reserves are down USD24.66 billion on end of Q4 2014. In other words, we need to see several more weeks of improved reserves before we can call a new trend.

20/3/15: Central Bank Interventions in Ruble Markets down to Zero in February

Don't hear much of "Panic at the Central Bank of Russia" reports as of late in the Western media - the ones that whipped into frenzy Russia 'analysts' back in November-December? Why, no surprise:

Per latest data, CBR interventions in forex markets defending the Ruble have shrunk in February 2015 to zero for USD and zero for EUR. Yep, zero.

Oh, and the table above shows, the panic of November-December 2014 Ruble crisis - real as it was - was not as bad as CBR supporting Ruble prior to the free float and during the peak of Crimean crisis.

So was the decision to let Ruble float wise? You decide. On the trend, it saved CBR some USD8.5 billion and EUR1.2 billion, even counting in December 2014 crisis.

7/3/15: Fitch on Russian Banks: January data

Earlier this week, Fitch Ratings published 'Russian Banks Datawatch', covering banks' balance sheet data as of 1 February 2015. Fitch Ratings noted the following key developments in January:

• "Corporate loans increased by RUB2.2trn (6.5%) in nominal terms in January", down -0.9% "after adjusting for 23% rouble depreciation against the US dollar"
• "Retail lending dropped by a moderate RUB46bn (-0.4%) in nominal terms", but fell -1.1% in USD terms. Majority of banks are deleveraging at a rate of 1-4%
• "Customer funding grew by RUB3.5trn (8.2%) in nominal terms", down only -0.1% "net of currency valuation effects as RUB328bn outflow from retail accounts was only partially compensated by RUB264bn inflow of corporate (excluding government entities) funding"
• CBR funding: "Banks repaid about RUB1trn of state funding in January, which had become expensive after the Central Bank of Russia (CBR) increased the key interest rate to 17% from 11.5% in December 2014 (before cutting it slightly to 15% in February 2015)". Note: these repayments offset official forex outflows recorded in the months when banks borrowed funds. As a reminder, when a bank borrows in forex from the CBR, the borrowing is recorded as forex outflow. When the bank subsequently repays the funds in forex, the repayment is entered as forex inflow. But if the bank repays borrowings in RUB, the repayment is registered as an inflow in RUB.
• Actual CBR funding deleveraging by the banks was even steeper: Banks repayment of RUB1trn is broken down into (1) "RUB1.6trn decrease of CBR funding" offset by (2) "RUB0.6trn increase in deposits from the Ministry of Finance, regional and federal budgets". Note: as deposits are liabilities, higher holdings of official deposits within the CBR account counts against the CBR balance sheet.
• Fitch notes that going forward, "This trend [of net repayment of CBR loans] is likely to continue unless the CBR lowers the key rate further ...CBR funding of the sector in foreign currency has become significant, totalling USD21bn (of which USD9.5bn was provided to Otkrytie) at 1 February 2015".
• Banks' profitability: "The sector reported a RUB34bn net loss in January (-6.2% annualised ROE). Alfa-bank significantly outperformed the sector with a net income of RUB30bn mainly due to FX-revaluation gains. Among state banks only Sberbank reported net income, at RUB3.7bn, while others were loss-making: VTB group had a loss of RUB21bn, Gazprombank RUB8bn and Russian Agricultural Bank RUB4bn. Retail banks performed poorly, and most were loss-making..."
• Banks capital ratios: "The average total capital ratio (10% required minimum) of the 100 sample banks decreased by 54bps in January. As at end-1M15, seven banks in the sample (of those publishing capital ratios) had a total capital ratio below 11% [one of them] Fondservisbank (10.4%), was put under CBR temporary administration in February."
• Capitalisation forward: "The announced state recapitalisation measures of over RUB2trn should moderately support banks' capitalisation, although these will be available primarily for larger banks" In other words, expect push for more banks consolidations from Q2 2015.

Summary: corporate lending is up in RUB terms but down in USD terms, retail lending is down both in RUB and USD terms. Deposits up in RUB terms and flat in USD terms, Profitability down significantly and the sector is generating net losses. Capitalisation down with a number of smaller banks heading closer to regulatory minimum, implying that recapitalisation funds will have to be used pretty soon and sector conslidation is likely to accelerate.